It's Not That Big a Deal

Does Portland’s CEO Tax Indicate Progressive Shift to Local Focus?

Starting next year, publicly traded companies operating in Portland, OR will be subject to a new tax surcharge if their CEOs are compensated at a rate exceeding 100 times that of their median employee. Per a Dodd-Frank regulation approved in 2015, public companies must disclose details of CEO and worker compensation beginning in 2017.

Such companies will have to pay an additional 10% to the existing business income tax owed to the city, calculated as 2.2% of their net income less operating losses. Companies whose CEOs earn over 250 times more than their median employee will have to pay a 25% surcharge.

Officials from the city estimate the new tax will apply to about 550 companies and provide between $2.5 million and $3.5 million in new revenue to the city’s general fund, which funds basic public services.

The new measure is the first of its kind; proponents are describing it as an innovative step in countering growing income inequality–one that they hope other cities will adopt. Skeptics of the new tax, most notably the Portland Business Alliance, say it won’t reduce income inequality and that the city government should instead try to work with local businesses to boost job growth.

Both parties have good points. In isolation, the surcharge isn’t likely to do much in the way of reducing inequality. For starters, under the new SEC law corporations are given wide latitude to calculate median worker earnings (it’s more difficult than it sounds when you have workers in multiple countries with varying types of employment). More practically, large corporations with highly compensated executives do relatively little of their business in Portland. The city, to its credit, seems to understand this and isn’t eager to overplay its hand, hence the relatively small amount of revenue being raised by the tax.

But if enough cities adopted laws penalizing high CEO-worker compensation ratios, it could conceivably make a big enough dent in corporate profits to spur a change (though this might look substantially different from what lawmakers envision).

That seems to be exactly what Portland’s government hopes to catalyze. “It falls to cities to do creative, progressive policymaking,” Mayor Charlie Hales said, “and this is exactly what this is.” The real story here might not be a change to Portland’s tax code, but instead a change to the arenas in which progressive politicians choose to fight for their policies.

Faced with a Republican-dominated federal (and in some cases, state) government, large cities, which overwhelmingly tend to elect Democratic leadership, could increasingly take it upon themselves to implement the changes that elude them on the national level.

In cases where progressives advocate for the expansion of existing laws, they could find it easier to achieve such policy at the local level. This is for two reasons: First, the politics and economics are more likely to align; second, doing so is largely consistent with our system of federalism that allows for local expansion of federal law.

Consider that many large cities have seen fit to implement minimum wages that exceed the levels set by the states in which they reside, which often themselves exceed the $7.25/hour wage set by the federal government.

Focusing on advancing progressive policy at the city level should, in theory, mollify conservative opposition that has long stressed the importance of local governance. However this doesn’t necessarily appear to be the case: two days after Birmingham raised its minimum wage to $10.10/hour, the state of Alabama passed a law retroactively denying cities and towns within the state the ability to set their own minimum wages. The law is being contested in court.